Which of the following statements is CORRECT?
A) If rates fall after its issue, a zero coupon bond could trade at a price above its par value.
B) If rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
C) If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.
D) If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
E) If a coupon bond is selling at par, its current yield equals its yield to maturity.

Question

Quizplus · Accepted Answer

When a coupon bond sells at par, it means that its price is equal to its face value. In this case, the current yield, which is equal to the annual coupon payment divided by the market price, is the same as the yield to maturity, which takes into account the total cash flows from the bond and the time value of money. Therefore, statement E is correct. Statements A, B, C, and D are incorrect. A zero coupon bond always trades at a discount from its face value, and its price appreciates as interest rates fall. The expected appreciation could become lower if rates fall too rapidly, but it cannot be negative. A firm moving toward financial distress is likely to experience an increase in its bonds' yield to maturity due to higher perceived risk. When a bond sells at a premium, it means that its yield to maturity is lower than its coupon rate, not the other way around.

Which of the Following Statements Is CORRECT